Question

What are the two stages of accounting for a purchase discount? (Check all that apply.)

a. The purchase is first recorded at the discounted amount
b. The Accounts Payable account is later reduced by the discounted amount
c. The Inventory account is first reduced by the expected discount
d. The Inventory account is later reduced if payment is made within the discount period
e. The purchase is first recorded at full cost

Answer 1

The two stages of accounting for a purchase discount are recording the purchase at full cost and later reducing the Inventory account if payment is made within the discount period.

Step-by-step explanation:

In accounting for a purchase discount, the two stages typically involve the following:

1. The purchase is first recorded at the full cost.
2. The Inventory account is later reduced if payment is made within the discount period, which reflects the actual payment amount.

This process falls under purchase discounts, where companies can take advantage of cost savings offered by suppliers for early payment of invoices. These discounts incentivize the prompt settlement of accounts payable. When the company makes a purchase on credit, it records the transaction at the full invoice amount in both the Inventory account and Accounts Payable. If the company pays the invoice within the discount period, it will credit Accounts Payable for the full invoice amount and debit it for the discount taken, adjusting the Inventory account accordingly to reflect the reduced cost of the purchased goods. This accounting treatment ensures that the financial statements accurately reflect the actual costs and liabilities.